Chairman’s statement

Introduction

This year, the only place to start my letter
to shareholders is by congratulating all my colleagues at Pearson on the 2008 results. The growth in earnings that we are reporting would be a good achievement in any year.

In a year when the global economy tipped into
recession and the financial system came close
to collapse, this is a remarkable performance.

Before I came to Pearson, I had a long career in banking,
finance and investment. The disruption and dislocation
that we’ve seen in the last year or so are as severe as
anything I can remember. That is causing considerable
distress in many parts of the global economy – across
geographies and across industries – and many good
solid companies are being damaged by the withdrawal
of credit and the crisis of trust.

To my mind, the achievement of these results in the
middle of this crisis speaks volumes about Pearson’s
strategy and our ability to execute it. I’d like to highlight
a few points:

All-round growth

The executive team has quietly and determinedly
pursued its vision of growing each one of our businesses
by investing in their content, digital transformation and
international expansion. A relentless focus on efficiency
and costs has enabled those investments.

As a result of that strategy, one feature of the 2008
results is that every part of Pearson has once again
achieved good earnings growth. This is by no means
universal in our industries. I believe that the growth
we are reporting and the market share gains we are
achieving provide evidence that our bold and dogged
investments in digital services and emerging markets
are giving us a sustainable competitive advantage.
I also believe that we can further strengthen our
market positions while the economic conditions
place some pressure on our competitors.

The company has consistently built our global education
business, steadily shifting capital towards our most
attractive growth opportunities. We don’t believe that
this company is immune from a severe economic
downturn – I don’t know of any company that doesn’t
suffer when its customers are under pressure – but we
are convinced that the inherent demand for learning is
significant, and that the political will to invest in education is widespread and enduring.

Consistent execution

My own personal belief is that this bear market and
economic downturn will reward companies that are
focused on the fundamentals of building a business.
Those include great products that consumers need,
customer service, steady growth built on core skills, clear
strategy, sound financial position and strong company
culture. It is to Pearson’s credit that it has remained
totally focused on those fundamentals through an era
of mind-bogglingly complex product ‘innovation’ and
financial engineering.

It is especially pleasing to be able to repeat an
observation that I made last year: that this is not just one
year of good performance, but another data point along a
consistent record of growth.

Shareholder returns

That track record is no accident, but the result of a clear
strategy that we have been steadily pursuing to achieve
consistent and reliable growth in shareholder value.
On the first element of that value – the share price
itself – we ended 2008 12% lower than we started it.
We’ll never be satisfied with that kind of performance
in absolute terms.

But our relative performance gives us some comfort that
investors recognise the quality of our business, the
strength of our strategy and the consistency of our
growth. Because that 12% decline in Pearson’s share
price compares with much sharper falls elsewhere in a
terrible year for equity markets: the FTSE 100 ended the
year 31% lower, the FTSE Media Sector was 34% lower
and the DJ Stoxx Media was 42% lower.

Total shareholder return

The second element of our return to shareholders – the
dividend – increased in real terms once again. For 2008,
our total shareholder return (which takes into account
the share price and dividends paid) was down 8%.
Again, this was significantly ahead of the FTSE 100
(down 28%), the FTSE Media Sector (down 32%) and
the DJ Stoxx Media (down 40%).

Your board considers the dividend to be an extremely
important part of its strategy for value creation – a good
discipline in terms of our cash generation; a signal about
our confidence in Pearson’s prospects; and a vital,
reliable cash distribution to shareholders. In fact, Pearson
has increased the dividend faster than the rate of inflation
for every one of the past 12 years, returning £2.2bn to
shareholders through the dividend over that period.
We are proposing a 2008 final dividend of 33.8p.

We know that our shareholders, ourselves included,
are looking for real growth in value in absolute terms.
That is our goal, and while we cannot defy the sharp
recent swings in equity markets, we remain clear that the
most reliable way to generate that value is by producing
consistent and sustainable growth in Pearson’s earnings,
cash flows and return on capital, year after year.

Strong position in tough markets

While we are very pleased about Pearson’s performance
in recent years, none of us is under any illusion: the
short-term outlook is tough and 2009 will be a difficult
year. All kinds of companies, including our own, will
be affected.

That said, I do believe that Pearson is in a relatively
strong position. We have good cash flows and a strong
balance sheet, having resisted the fashion for taking on
cheap debt during the credit bubble. We have changed
the shape of the company, reducing our exposure to
volatile revenue sources like advertising and moving
towards more resilient ones like subscriptions and long-term
service contracts. And, above all, we have focused
the business on the global market for education, where
the long-term growth opportunities are very significant.

As a result of all those things, I’m as confident as I can
be that Pearson is in good shape to weather these very
difficult economic conditions. I look forward to
discussing these and any other issues with you
at our annual shareholders’ meeting.